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THE EFFECTIVENESS OF DEMAND-SIDE

GOVERNMENT INTERVENTION TO PROMOTE

ELDERLY EMPLOYMENT: EVIDENCE FROM JAPAN

AYAKO KONDO AND HITOSHI SHIGEOKA*

In this article, the authors examine the effect of a demand-side gov-ernment intervention on employment of the elderly. The growinggap between the increasing pension eligibility age and the manda-tory retirement age has emerged as a serious social concern inJapan. Starting in 2006, the government legally mandated employ-ers to offer continuous employment up to the increased pensioneligibility age. By comparing cohorts affected and unaffected by thepolicy, the authors find that such legal enforcement increases theemployment rate of men in their early 60s. Furthermore, the effectis concentrated on employees at large-sized firms, where mandatoryretirement was applied more strictly in the past. The authors thenexamine potential complementarity between pension reform––theconventional supply-side intervention––and the demand-side inter-vention. Evidence suggests that the impact of an increase in pensioneligibility age on elderly employment is slightly larger when com-bined with legal demand-side enforcement.

*AYAKO KONDO is an Associate Professor in the Institute of Social Science at the University of Tokyo.HITOSHI SHIGEOKA is an Assistant Professor in the Department of Economics at Simon Fraser University.This research is supported by JSPS KAKENHI Grant Numbers 23730235 and 15K17072 (PI: AyakoKondo). All the analyses based on the Labour Force Survey were implemented by Ayako Kondo with theapproval of the Statistics Bureau of the Ministry of Internal Affairs and Communications. We are gratefulto two anonymous reviewers and the editor; to David Green, Hidehiko Ichimura, Daiji Kawaguchi,Joanna Lahey, Yuichiro Mizumachi, David Neumark, Hideo Owan, Johannes Schmieder, Stefan Staubli,Kosuke Takeda, and Till von Wachter; and to seminar participants at the European Society ofPopulation Economics (ESPE), European Association of Labour Economists (EALE), JapaneseEconomic Association (JEA), Kansai Labor Workshop, National University of Singapore, NationalBureau of Economic Research (NBER) Japan project meeting, Ministry of Health, Labour and Welfare,Osaka Workshop on Economics of Institutions and Organizations (OEIO), Singapore ManagementUniversity, Society of Labor Economists (SOLE), Tokyo Labor Workshop, and University of Tokyo fornumerous suggestions. Disclaimer required by the Statistics Bureau: 1) Since the Labour Force Survey isa sample survey, all results are potentially subject to sampling errors; 2) all the analyses in this paper aredone by the author, not the Bureau, and thus, their consistency with the Bureau’s official reports is notguaranteed. Additional results and copies of the computer programs used to generate the resultspresented in the article are available from the authors at [email protected] and [email protected].

KEYWORDs: demand-side government intervention, elderly employment, Elderly Employment StabilizationLaw

ILR Review, XX(X), Month 201X, pp. 1–29DOI: 10.1177/0019793916676490. � The Author(s) 2016

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Population aging and the resulting pressure on the social security systemare emerging as serious social concerns across countries. One potential

solution is to increase the employment of the elderly, and thus, govern-ments have undertaken a variety of strategies, such as changes in social secu-rity benefits and pension eligibility age, to increase the elderly labor supply.Numerous studies have documented that such supply-side interventionsaffect elderly labor supply.

Studies on government interventions on the demand-side are limited,however. A few exceptions include studies on legal prohibition of age dis-crimination as well as mandatory retirement, but the evidence on elderlyemployment is mixed. Furthermore, even fewer studies have examined thecomplementarity of demand-side and supply-side interventions. The conven-tional supply-side interventions, such as the increase in pension eligibilityage, can be more effective when implemented together with these demand-side interventions. One notable exception is Neumark and Song (2013),who found that, in the United States, the legal protection against age dis-crimination indeed strengthens the effect of the pension reforms.

The objectives of this article are twofold. Our first objective is to examinethe effect of a demand-side government intervention, namely the revisionof the Elderly Employment Stabilization Law (EESL) in Japan, on employ-ment of the elderly. Since the government started to gradually raise the elig-ibility age for the full pension benefit from age 60 in 2001, the wideninggap between the mandatory retirement age (age 60 in most firms)1 and theincreased pension eligibility age have emerged as a growing concern. Thus,in 2006, five years after the first increase in the pension eligibility age, thegovernment finally revised the EESL and mandated employers to offer con-tinuous employment up to the increased pension eligibility age.2

We exploit this five-year lag between the pension reform and the EESLrevision to estimate the effect of the EESL on elderly employment. Becauseboth reforms are applicable to cohorts who turned 60 or older, the lagamong adjacent cohorts created a gap in the age until which employers arelegally obliged to continue employment. Although the pension eligibilityage is 63 for cohorts born in 1945 and 1946––because the pension eligibilityage increases by one year, every two years––the employers had to offer con-tinuous employment until age 63 only for the cohort born in 1946. For thecohort born in 1945, no employment protection is offered after the manda-tory retirement age of 60. Thus, we compare the employment of these adja-cent cohorts to examine the policy impact of the EESL revision.

It is not a priori obvious whether the EESL revision affects employmentof the elderly in their 60s, for two reasons. First, even before the EESL

1No explicit law against age discrimination exists in Japan, and it is legally permissible for employers toset the mandatory retirement age to 60 years. See the Background section for more details.

2Note two important differences between the anti-age discrimination laws in the United States and theEESL in Japan: The EESL explicitly targets the protection of workers before they reach the pension elig-ibility age, and it still allows employers to force retirement after age 65.

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revision, no prohibition on employing workers older than 60 existed; there-fore, if no excess supply of labor is realized, the EESL revision may havehad no effect. Second, since the revised EESL provides no clear guidelinefor wages and working hours for the continued employment of elderlyworkers, firms could induce ‘‘voluntary’’ retirement at age 60 by offeringvery low wages to workers older than 60.

Additionally, the effect of the EESL revision may differ across firms ofvarying employment size. In particular, the effects may be concentratedamong employees at large-sized firms. Because the mandatory retirementage was more strictly applied to large-sized firms, these firms had morescope to employ workers who would have retired at the mandatory retire-ment age in the absence of the revised EESL. Hence, the costs imposed bythe EESL––as the EESL requires employers to hire workers whom theywould not have hired otherwise––might also be larger for large-sized firmsthan for medium- or small-sized firms. To accommodate these elderly work-ers, firms may need to restrict the hiring of younger workers, or changetheir wage profiles. If they cannot make such adjustments, they may need tobear additional costs from labor hoarding.

Our second objective is to explore the combined effect of supply-sideand demand-side interventions on employment by exploiting the gradualrise in pension eligibility age. First, we compare the cohort born in 1947,whose pension eligibility age is 64, with the cohort born in 1946, whose pen-sion eligibility age is 63. Because both cohorts were subject to the EESL revi-sion, the difference between them can be interpreted as the combinedeffect of the increased pension eligibility age (supply-side intervention) andthe revised EESL (demand-side intervention). Then, we compare thecohort born in 1945, whose pension eligibility age is 63, and the cohortborn in 1944, whose eligibility age is 62, to examine the effect of a supply-side intervention alone, since both cohorts were not subject to the revisedEESL. By comparing these two estimates from separate regressions, we caninvestigate whether the increase in pension eligibility age was more effectivewhen combined with the mandated continued employment.

Japan’s current situation is unique, in the sense that firms are legally per-mitted to set the mandatory retirement age (age 60) lower than the fullpension eligibility age. By contrast, most Western countries prohibit manda-tory retirement at ages lower than the pension eligibility age. Japan’s experi-ence, however, provides useful lessons—especially for other Asian countries,where the proportion of the population who are at or near retirement ageis expected to rapidly increase in the near future.

For example, a similar problem of a shortage in labor demand for work-ers older than 60 is emerging in Korea (Choi 2006), which in 2013 also gra-dually increased the pension eligibility age from 60 to 65. Although theKorean government decided to raise the legal lower limit of the mandatoryretirement age to 60 in 2016, a gap remains between the mandatory retire-ment age and the pension eligibility age. Mandatory retirement around age

GOVERNMENT INTERVENTION TO PROMOTE ELDERLY EMPLOYMENT 3

60 is prevalent among other Asian countries as well, and so how to increasethe employment rate of the elderly will become an important policy issue inall of these countries in the near future.

Background

Pension Reform Act and EESL Revision

Population aging is an important social concern in Japan. The ratio ofelderly (65 years or older) increased from 14.6% in 1995 to 23.1% in 2010(Population Census of Japan 2010), which is already the highest among theOrganisation for Economic Co-operation and Development (OECD) coun-tries. This ratio is expected to keep rising and to exceed 30% by 2025(National Institute of Population and Social Security Research 2013).

Because the Japanese public pension program is designed as a pay-as-you-go system, this rapid expansion of the retirement age population puts anenormous fiscal pressure on the social security system. In response, the gov-ernment of Japan implemented two major reforms: the Pension Reform Actin 2001 and the revision of the EESL in 2006. Table 1 summarizes the tim-ing of each policy change.

The Pension Reform Act implemented in 2001 gradually raises the elig-ibility age from 60 to 65 for the fixed part of the pension benefit.3 More spe-cifically, the eligibility age increases by one year every two years, until itreaches age 65 for the cohort born in 1949. When the Pension Reform Actwas implemented, the existing EESL prohibited firms from setting the man-datory retirement age to younger than 60 years, and thus, many privatefirms set age 60 as the mandatory retirement age.4 Since the pension elig-ibility age for employed workers had also been 60 until 2001, most employ-ees in private companies continued to work until they became eligible forthe full pension benefit. Because of the Pension Reform Act, however, thosewho turned 60 in 2001 or later could no longer receive the full pensionbenefit at the age of 60.

This growing gap between the pension eligibility age and the mandatoryretirement age, which was still 60 in most firms, emerged as a serious socialconcern. To fill this widening gap, in 2006, five years after the implementa-tion of the Pension Reform Act, the revision of the EESL was enacted.5 Therevised EESL legally mandated employers to offer continuous employmentuntil the pension eligibility age, beginning with those who turned 60 in2006 (i.e., cohorts born in 1946).

3Employee’s Pension comprises the fixed part of the pension benefit and an additional benefit propor-tional to past earnings. See the section on Japan’s public pension system for more details.

4The EESL was first enacted in 1971 and was intended to protect and promote the employment ofworkers older than age 50. The first major revision enacted in 1998 prohibited firms from setting themandatory retirement age to younger than 60.

5This revision of the EESL was passed in June 2004 and enacted in April 2006.

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Table 2 summarizes how each reform was applied to each cohort. It liststhe age until which employers are legally obliged to offer continuousemployment (by the revised EESL) and the eligibility age of men for the fullpension benefit (by the Pension Reform Act). As seen from Table 2, thefive-year lag between the two reforms created a gap in the ages until whichemployers are legally obliged to continue employment between the cohortsborn in 1945 and 1946. Although the pension eligibility age is 63 for bothcohorts, the employers had to offer continuous employment until age 63for the cohort born in 1946 but not for the cohort born in 1945.Empirically, we exploit this gap and compare the employment of these adja-cent cohorts to examine the impact of the EESL revision.

Turning to the comparison between the 1946 and 1947 cohorts, whileboth cohorts are subject to the revised EESL, the pension eligibility age

Table 1. Major Revisions of Elderly Employment Stabilization Law and RelatedPension Reforms, 1986–2011

Year

EESL Pension

Contents Cohort affected Contents Cohort affected

1986 Obligation to make aneffort not to set themandatory retirement ageyounger than 60

1926–

1990 Obligation to make aneffort to continueemployment aftermandatory retirement age

1930–

1994 Announcement thatmandatory retirementyounger than 60 would beprohibited from 1998

Announcement of thegradual rises in eligibilityage of Old-Age BasicPension from 2001

1998 Mandatory retirementyounger than 60 becameillegal; Obligation tomake effort to continueemployment until age 65

1938–

2001 The eligibility age of Old-Age Basic Pension startedto rise (by one year of agein every two years until2013)

1941–

2004 Announcement thatcontinuing employmentuntil the pensioneligibility age would belegally mandated from2006

Revision of Old-AgeEmployees’ Pensionearnings test to encouragelabor supply

2006 Legal obligation tocontinue employmentuntil the pensioneligibility age

1946–

Note: Bold type indicates that these policy changes are especially relevant in this article.


(and thus the maximum age of the mandated employment) is 63 for the1946 cohort but 64 for the 1947 cohort. Therefore, the difference inemployment between these two cohorts can be interpreted as the combinedeffect of the pension eligibility age and the mandated continued employ-ment by the revised EESL. In the same vein, the difference in employmentbetween the 1944 and 1945 cohorts, both not subject to the revised EESL,measures the effect of the pension eligibility age in the absence of the man-dated continued employment.

A comparison of a pair of older cohorts—both of which share the samepension eligibility age—may serve as a falsification test to ensure that wehave not spuriously captured the increasing trend of employment amongthe elderly. The immediate candidate is a comparison of cohorts born in1943 and 1944, who share the same pension eligibility age of 62.Unfortunately, a comparison between these two cohorts is not appropriate,as each cohort is differentially affected by another pension-related reformimplemented in 2005––the revision of the earnings test for the pension ben-efit. The earnings test was once considered a cause of the lower labor supplyof the elderly, as the amount of benefit decreases as earnings increase. Therevision announced in 2004 and enacted in April 2005 intended to weakenthis discouragement effect and hence increase the labor supply. Since thisrevised earnings test was applied in 2005 to all workers over the age of 60,the age from which the new earnings test was applied differs across cohorts.Therefore, even though the cohort pair of 1943 and 1944 share the same

Table 2. Legal Lower Limit of Mandatory Retirement Age and Age until whichEmployers Are Obliged to Continue Employment

Cohortborn

Legal lower limit ofmandatory retirement age

Age until which employers arelegally obliged to continue employment

Eligibility age of Old-AgeEmployee’s Basic Pension (for men)

1938 60 60 601939 60 60 601940 60 60 60

1941 60 60 611942 60 60 611943* 60 60 621944* 60 60 621945 60 60 631946 60 63 63

1947 60 64 641948 60 64 641949 60 65 651950 60 65 65

Notes: In both the pension system and the EESL, ‘‘cohort born in year X’’ is defined as those bornbetween April in year X and March in year X+ 1.*Although cohorts born in 1943 and 1944 share the same age until which employers are legally obligedto continue employment and pension eligibility age, they may have been affected differentially by therevision of the pension earnings test announced in 2004 and enacted in 2005.

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pension eligibility age, their labor supplies might have been differentiallyaffected by this change in the earnings test.6 Furthermore, at the time oftheir mandatory retirement in 2004 (when the revision of the earnings testwas announced), the cohort born in 1944 knew that the earnings test wouldchange in the subsequent year, whereas the cohort born in 1943 did not.This circumstance may make it more difficult to interpret differences in out-comes between the cohorts born in 1943 and 1944.

Therefore, we use the cohort pair of 1941 and 1942 in the falsificationtest. These cohorts share the same pension eligibility age of 61, and neithercohort is covered by the EESL. Furthermore, the effect of the earnings testrevision is expected to be limited, as members of these cohorts were already63 and 64 years old in 2005, respectively.7 We report the results of this pla-cebo check later, in the Falsification Test section.

Japan’s Mandatory Retirement System and the EESL

To examine the impact of the EESL revision, it is essential to understandthe mandatory retirement system. In Japan, regular staff (or seishain inJapanese) are full-time workers on the lifetime employment track withincreasing age-earnings profiles, and mandatory retirement (or teinen)refers to the termination of such a lifetime employment contract.8 Prior tothe EESL revision in 2006, employees typically retired either in the monththey turned 60 or at the end of the fiscal year in which they turned 60.After this mandatory retirement, some workers left the labor force or beganworking for a new employer, but a substantial number of the retiredemployees continued to work at the same employer on a new employmentcontract. The EESL revision in 2006 legally mandated firms to offer suchopportunities (to stay in the same firm) to all employees below the pensioneligibility age.9

To fulfill the legal obligation of continued employment in the EESL,employers must take at least one of the following three measures: 1) raisethe mandatory retirement age to the pension eligibility age, 2) abolish man-datory retirement, or 3) set up a formal rule for employment extension(kinmuencho) or reemployment (saikoyo). Employment extension entailsrenewing the existing employment contract, and reemployment entails

6Strictly speaking, there is a difference in the application of the earnings test between the cohorts bornin 1944 and 1945.

7Thanks to an anonymous referee for pointing this out.8In Japan, a typical employment contract for regular staff does not specify the duration of the contract,

but it is implicitly assumed that the employer will continue to employ the worker on the same contractuntil the mandatory retirement (Passet 2003). In fact, the ratio of such workers in male salaried workersaged 45 to 54 years is 92% (Statistics Bureau 2014).

9Strictly speaking, until April 2013, employers could refuse to renew the contract for some employeeswho had reached the mandatory retirement age if those employees did not meet the criteria set by alabor management agreement. However, according to a press release by the Ministry of Health, Labourand Welfare (2014), only 2.3% of those who wished to continue employment were refused on thegrounds of such criteria.


terminating the existing contract and offering a new contract. In reality, themajority of firms avoid raising the mandatory retirement age or abolishingmandatory retirement altogether. Among establishments with 30 or moreemployees, 81% of establishments still set 60 as the mandatory retirementage, and as of 2012, most of them had instituted an explicit rule for eitherreemployment (80%) or employment extension (20%) rather than extend-ing the mandatory retirement age (Ministry of Health, Labour and Welfare2012).

Note that the revised EESL allows employers to offer reemployment con-tracts with much lower wages. Employers can even offer higher severancepay conditional on retirement at age 60 to induce ‘‘voluntary’’ retirement.To this effect, the revised EESL is much less binding than the requirementto raise the mandatory retirement age, which would mean that theemployer would have to retain the worker on the same contract as regular staff.According to the Japan Institute for Labour Policy and Training (2010),even in the case of full-time employment,10 reemployed workers receive sub-stantially lower wages than before ‘‘retirement’’: the average ratio of 61-year-old full-time workers’ earnings to the same workers’ earnings justbefore age 60 is 71.1%.

Furthermore, Japan’s unemployment insurance system makes it easierfor employers to offer very low wages to reemployed workers. The so-calledContinuous Employment Benefits (koyo keizoku kyufu) compensate workersaged 60 to 64 at significantly lower wages than those paid before theyreached age 60. Although no change in the benefit is observed before andafter the EESL revision in 2006, the ratio of workers receiving the benefitincreased after the EESL revision in 2006: while the ratio of workers aged60 to 64 who received this benefit was stable at around 38% until 2006, theratio increased to 40.3% in 2007, 43.4% in 2008, and as high as 52.7% in2013, the most recent year for which statistics are available.11

We expect the effect of mandated continued employment to be largerfor employees in large-sized firms than in medium- or small-sized firmsbecause mandatory retirement was more strictly applied in such firms, andthus they had more room to employ workers who would have retired at themandatory retirement age in the absence of the EESL revision. Small-sizedfirms, however, tended to provide more opportunities to work beyond age60, even prior to the EESL revision. In 2004, 38.2% of firms with 5 to 29employees set the mandatory retirement age at 65 or older (instead of 60),or they did not have the mandatory retirement system. By contrast, the ratiofor firms with more than 1,000 employees was 1.7% (Ministry of Health,Labour and Welfare 2004). In addition, among the firms that have a formal

10The Japan Institute for Labour Policy and Training (2010) also reported that about 70% of thereemployment workers are on full-time employment, and the remaining 30% are employed part-time.

11Number of recipients is taken from the annual report of unemployment insurance (Ministry ofHealth, Labour and Welfare 2013). Number of workers aged 60 to 64 is based on the Labour ForceSurvey.

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rule of reemployment or employment extension, the ratio of workers whocontinued to work at the same firm after reaching age 60 was 77.1% forfirms with 5 to 29 employees and 27.4% for firms with more than 1,000employees (Ministry of Health, Labour and Welfare 2004).

Like the anti-age discrimination laws in the United States, the EESL doesnot specify any financial penalty or criminal punishment for firms that donot comply with the law. Instead, the government enforces the law mainlythrough administrative guidance (gyosei shido) (Sakai 2015; Yamakawa2015). Administrative guidance includes the government’s official requests,warnings, and publicizing names of violating firms, all of which incur sub-stantial administrative as well as reputation costs to the firms subject to this‘‘guidance.’’12 Thus, the threat of administrative guidance works as anenforcement mechanism in Japan, whereas the threat of litigation plays asimilar role in the United States.

Japan’s Public Pension System

Japan’s public pension system consists of three subsystems, and everyonefrom age 20 to 60 is mandated to enroll in one of them: Employee’sPension for employees of private companies, Mutual Aid Pension for publicservants, and National Pension for others.13 People enrolled in the NationalPension system are meant to receive only the so-called basic benefits fromage 65. Enrollees of Employee’s Pension or Mutual Aid Pension pay anextra premium, which is proportional to their earnings, and will receiveextra benefits after retirement.14

More specifically, the benefits of the Employee’s Pension consist of thebasic part, which is determined by the number of months the person haspaid the contribution, and the proportional part, which is based on theamount of premiums paid in the past. The basic part is designed to beequivalent to the basic benefit of the National Pension, except that the elig-ibility age for the benefits under the National Pension system has been 65since its introduction in 1961, whereas the corresponding age for theEmployee’s Pension system was 60 until 2001. According to the AnnualReport of Social Security, the average monthly benefit of the basic part isabout JPY 56,000 (roughly USD 560), and the average monthly benefit ofthe proportional part is about JPY 93,000 (roughly USD 930), though theamount of the proportional part varies significantly depending on earningsbefore retirement.

12Administrative guidance has been an important and effective tool for the government to implementits policy in Japan (OECD 1999).

13In Japanese, the Employee’s Pension, Mutual Aid Pension, and National Pension are called KoseiNenkin, Kyosai Nenkin, and Kokumin Nenkin, respectively.

14In addition to the mandatory public pension, large-sized firms often provide firm pensions. The min-imum age to claim benefit from such a firm pension is usually set at the mandatory retirement age. Bycontrast, private pension contracts are rare among the cohorts we studied at that time.


The Pension Reform Plan enacted in 1994 announced that the eligibilityage for the basic part of the Employee’s Pension would be raised from 60 to65. The timing of the change for males is summarized in Table 2. The samereform was implemented for the Mutual Aid Pension applicable to public-sector employees. In the meantime, the eligibility age for the proportionalpart remained at 60 until 2013, although it is also slated to be raised to 65by 2025.

Although it is possible to receive pension benefits while working, theamount of the monthly pension benefit is reduced as the recipient’s earn-ings increase.15 Existing studies on Japan’s earlier pension reforms (e.g.,Oishi and Oshio 2000; Abe 2001) showed that the changes in the amountsubtracted from the pension benefit have significant effects on the elderlylabor supply. As mentioned previously, this earnings test was relaxed in2005 to encourage labor supply of elderly workers.

In summary, the Pension Reform Act increased the minimum age forclaiming the basic part of the pension, while leaving unchanged the age forclaiming the proportional part of the pension. Additionally, while theamount of the proportional part varies significantly depending on earningsbefore retirement, on average, the proportional part is larger than the basicpart. Therefore, employees could retire at age 60 and claim their accruedpension from the proportional part immediately upon retirement, whileclaiming the basic part of the pension a few years later.16 Thus, we expectthe impact of the pension reform on employment to be modest.

Existing Studies

Many studies have examined the effect of supply-side interventions onelderly worker’s labor supply: for example, Krueger and Pischke (1992),Gustman and Steinmeier (2005), Mastrobuoni (2009), and Behaghel andBlau (2012) for studies pertaining to the United States; Manoli and Weber(2012) and Staubli and Zweimuller (2013) for those pertaining to Austria;and Ishii and Kurosawa (2009) for those pertaining to Japan.

By contrast, studies on demand-side interventions are relatively scarce,and their results are mixed. On one hand, von Wachter (2002) found a sig-nificant increase in labor force participation among elderly men after the

15Specifically, if the sum of the pension benefit and earnings exceeds JPY 280,000/month, a value of(pension benefit + earnings – 280,000)/2 is subtracted from the pension benefit. Furthermore, if thesum of pension benefit and earnings exceeds JPY 460,000 (pension benefit + earnings – 460,000), it issubtracted from the pension benefit; that is, the sum of the pension benefit and earnings never exceedsJPY 460,000 until the earnings exceed JPY 460,000. Those whose monthly earnings exceed JPY 460,000cannot receive any pension benefits. In addition, until 2004, all recipients with positive earnings suffereda 20% reduction in their pension benefits, regardless of their earnings.

16Furthermore, workers who retire can claim unemployment benefits by pretending to seek a job. Theunemployment benefits typically pay half the previous salary for up to 150 days. Note that one cannotreceive both old age pension and unemployment benefits simultaneously. Thus, if the amount of unem-ployment benefit exceeds the pension benefit, retired workers may choose not to claim pension untilthe unemployment benefit expires.

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Age Discrimination in Employment Act made mandatory retirement illegalin the United States in the 1980s.17 On the other hand, Shannon andGrierson (2004) found that the abolition of mandatory retirement in Canadadid not increase the size of the elderly workforce. Even for the United States,Lahey (2008) provided evidence of a negative side effect: in states where filingan age discrimination claim by employees is less burdensome, firms seek toavoid litigation by not hiring elderly men in the first place.18

Evidence on the complementarity of demand-side and supply-side inter-ventions is even more limited. One of the few exceptions is the study byNeumark and Song (2013). They found that, in the United States, theincrease in employment attributable to reduced pension benefits and raisedfull retirement age was larger in states that have stronger protection againstage discrimination.

In Japan, a few existing studies have examined the effect of the EESL revi-sion. Yamamoto (2008) estimated the effect of the EESL revision using theKeio Household Panel Survey. He defined the treatment group as those whowere 60 to 62 years old as of January 2007, however, which includes cohortsborn in 1945 and 1944. This approach is problematic since the revised EESLaffects cohorts born in 1946 and after, as we explained previously. Kondo(2016) examined establishments’ adjustments in hiring and wages, using theEmployment Trend Survey (ETS) and the Basic Survey of Wage Structure(BSWS). Specifically, she examined how large-sized establishments changedtheir hiring practices in response to the EESL revision. Her results implied that,at least in the short run, the hiring of new graduates was not affected by theEESL revision. In addition, she found that earnings after age 60 substantiallydecreased among cohorts born in 1947 and later. Her findings complementour study on the effect of the EESL revision on older workers’ employment.19

Finally, our study also relates to the literature on the optimal retirementage, under the increasing age–earnings profile. The classical model ofLazear (1979) showed that, to resolve the agency problem, employers maywant to set the wages of younger workers to be lower than their productivity

17Johnson and Neumark (1997) presented pioneering work in this field by examining the effects ofthe employer’s age discrimination on job separation and employment in the United States. Further,Neumark and Stock (1999) examined the effect of the Age Discrimination in Employment Act in theUnited States on the age-earnings profile.

18A few studies analyzed the higher layoff taxes as a separate type of employment protection for elderlyworkers above age 50 in European countries. In France, Behaghel, Crepon, and Sedillot (2008) found arather negative effect on hiring, whereas the effect on layoffs was less distinct. In Austria, by contrast,Schnalzenberger and Winter-Ebmer (2009) found a significant decrease in layoffs of older workers with-out a decrease in hiring, because the layoff tax in Austria is applied only to workers with a tenure ofmore than 10 years.

19The ETS and the BSWS are establishment surveys rather than household surveys, and so the popula-tion covered by these surveys differs from that covered by the Labour Force Survey, our main source ofdata. Furthermore, the BSWS covers only workers regularly employed by private establishments in 16industries with more than five employees, or publicly operated establishments with 10 or more employ-ees. Therefore, any direct comparisons of the results of the current study to those from Kondo (2016)require extra caution.


and the wages of older workers to be higher than their productivity.20

Lazear (1979) also showed that it is essential to set a mandatory retirementage so as to make such wage policy profitable; otherwise, as long as olderworkers continue to work, the firm will need to pay wages higher than theirproductivity. Thus, theoretically, compelling firms to increase the manda-tory retirement age would unambiguously harm the firms’ profitability. Bycontrast, the reform addressed in this study––mandated continued employ-ment by way of the EESL––allows firms to offer a completely separate con-tract after the mandatory retirement age, potentially reflecting elderlyworkers’ true productivity.

Data

Our data are taken from the Labour Force Survey conducted monthly bythe Statistics Bureau of the Ministry of Internal Affairs andCommunications. The survey is nationally representative, repeated cross-sections, and distributed to about 40,000 households. The questions onemployment status are asked to all members who are 15 years or older(about 100,000 persons in total) in those households. The survey is con-ducted monthly on the last day of each month, and the reference period isthe last week of the month.

The outcome variables include dummy variables for labor force participa-tion; employment; self-employment; salaried workers (employed peopleexcluding the self-employed); and employees at large-sized private firms(500+), medium-sized private firms (100–499), and small-sized private firms(\ 100). We focus on salaried workers rather than all workers (the latter ofwhich include the self-employed), as self-employed workers are not subjectto the EESL and thus should not be affected by the revision. Additionally,the pension eligibility age for self-employed workers has been 65 since 1961,and so the Pension Reform Act is also irrelevant to them. Salaried workersdo, however, include public-sector employees, as they face the same changesin pension eligibility age as do private-sector employees. Note that the uni-verse of our data is the entire population, including those who are out ofthe labor force. That is, for the analysis of the salaried workers, we create adummy for being a salaried worker, while retaining the self-employed in thesample. Likewise, the population ratio of employees by firm size is the num-ber of salaried workers in each category of firm size divided by the entirepopulation.21

20Lazear’s (1979) argument is especially relevant to Japanese firms, as they tend to set steeper age–earnings profiles than do firms in other developed countries, and they value firm-specific skills more(Hashimoto and Raisian 1985).

21We focus on employment status as outcome variables because the Labour Force Survey does not pro-vide detailed information about wages. The survey asks only about the annual income in the previousyear, in the form of categorical variables (e.g., ‘‘1–2 million yen’’). This variable is very crude, and theway the question is asked makes it difficult to distinguish between the income earned before the workerturned 60 and the income earned after that age.

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As the Labour Force Survey records the year and month of birth for alladult respondents, we can identify the cohort that is affected by the revisedEESL (born in April 1946 or later) precisely. Note that in both the pensionsystem and the EESL, ‘‘cohort born in year X’’ is defined as those bornbetween April in year X and March in year X + 1, following the definitionadopted by the government. Additionally, age in months at the time the sur-vey was conducted is available. We use age in months for graphical presenta-tions and aggregate it to age in years for the difference-in-differenceanalyses.22

The latest available data are from the survey conducted in December2012. Thus, we can trace the cohort born in 1946 (those born betweenApril 1946 and March 1947) up to age 65 measured in years. The cohortborn in 1947 cannot be traced up to age 65; therefore, the comparisonbetween the 1946 and the 1947 cohorts is limited up to age 64. Table 3 pre-sents the summary statistics of key variables by cohort.

Finally, we limit our sample in the main analysis to men for the followingreasons. Women are less likely to be directly affected by the EESL, as theEESL covers employees who are on full-time employment until the manda-tory retirement age. The proportion of full-time employees in the femalepopulation in their 50s is as low as 10 to 15%. Furthermore, the eligibilityage for a woman to receive the full pension benefit depends on her entireemployment history in a complicated way. Because our data are cross-sectional, it is difficult to identify the pension eligibility age of each woman(see Appendix for details).

22‘‘X years old’’ includes from ‘‘X years and 0 months old’’ to ‘‘X years and 11 months old.’’

Table 3. Summary Statistics

VariableAll

By cohort

1944–1947 1944 1945 1946 1947

Sample size 217,191 52,901 41,138 58,684 64,468Labor force (%) 75.1 73.6 72.6 74.8 78.8Employed (including

self-employed) (%)70.9 69.2 68.5 70.7 74.6

Unemployed (%) 4.2 4.4 4.1 4.1 4.2Self-employed (%) 15.4 15.9 13.5 16.0 15.8Salaried workers 54.8 52.7 54.3 53.9 58.2

Large-sized firm (500+) (%) 9.9 8.7 9.4 10.1 11.2Medium-sized firm (100–499) (%) 9.6 8.9 10.0 9.2 10.5Small-sized firm (\ 100) (%) 31.1 30.8 31.0 30.8 31.9Public sector (%) 4.2 4.3 3.9 3.9 4.5Ranges of survey years 2003–2012 2003–2011 2004–2012 2005–2012 2006–2012

Notes: Cohort is defined as fiscal year of birth; i.e., cohort X includes those born in the period fromApril in year X to March in year X+ 1. Sample is limited to 59–65 year old people (age is measured inyears), except for 1947 cohort, which includes 59–64 year old people only. Salaried workers do notinclude the self-employed.


Empirical Strategy

We take the difference-in-difference approach by changing the combinationof the treatment cohort and control cohort to measure separate policyeffects.

First, we examine whether the EESL revision had any impact on theemployment of elderly workers in their early 60s by comparing cohorts bornin 1945 and 1946. As shown in Table 2, although the cohorts born in 1945and 1946 share the same pension eligibility age (age 63), the employers hadto offer continuous employment until age 63 for the cohort born in 1946but not for the cohort born in 1945. By comparing these ‘‘gap’’ cohorts, wecan isolate the effect of mandated employment.

Second, we examine how the interaction of supply-side (pension eligibil-ity age) and demand-side (EESL revision) interventions can be more effec-tive in increasing elderly employment than the supply-side intervention(pension eligibility age) only. To do so, we take advantage of the fact thatthe difference between the 1946 and 1947 cohorts captures the combinedeffect of the pension eligibility age and the EESL revision, whereas the dif-ference between the 1944 and 1945 cohorts captures the effect of the pen-sion eligibility age only, because the revised EESL is not applied to theseolder cohorts.

More specifically, we first compare the cohort born in 1947 (treatmentcohort), whose pension eligibility age is 64, with the cohort born in 1946(control cohort), whose eligibility age is 63, to estimate the combinedeffects. We then compare the cohort born in 1945 (treatment cohort),whose pension eligibility age is 63, and the cohort born in 1944 (controlcohort), whose eligibility age is 62, to estimate the effect of the pension elig-ibility age only (in the absence of the EESL revision). By comparing thesetwo separate estimates, we can examine whether the increase in the pensioneligibility age can be more effective when combined with the EESL revision.

In each comparison, we define the younger cohort as the treatmentcohort and the older cohort as the control cohort. Thus, three pairs oftreatment and control cohorts are used in our analysis: 1946 versus 1945 toidentify the effects of the EESL revision on employment, and 1947 versus1946 and 1945 versus 1944 to explore the interaction between the EESLand the increased pension eligibility age. We estimate Equation (1) usingthe sample of 59- to 65-year-old men born in the control and treatmentcohorts, setting age 59 as the baseline:

yi =X65

a = 60

Aa, i aa +baTið Þ+ gTi + dXi + eið1Þ

where yi represents one of the outcome variables, such as a dummy forbeing a salaried worker. Aa,i is a dummy variable indicating that individual iis a years old, and Ti is a dummy variable indicating that individual i belongsto the treatment group (i.e., the younger cohort). Our coefficient of

14 ILR REVIEW

interest is ba, which represents the effect of the policy change on the out-come variable at age a relative to age 59.

The underlying assumption for our estimation to produce unbiased esti-mates is that the two cohorts do not systematically differ from one anotherexcept for the EESL revision and increased pension eligibility age. It is pos-sible, however, that the labor market conditions at the time of the manda-tory retirement age could differ for the two cohorts. To mitigate such aconcern, we include regional unemployment rates and nine regional dum-mies in Xi.

23 Additionally, we control for the population size of men of thesame cohort and region to account for the baby boom that started in 1947.Practically, adding these controls has no impact.24

In all specifications, we report standard errors with clustering for year 3

cohort groups. Since there are only 10 or 12 clusters for each regression, weperform robustness checks to deal with small cluster sizes (Angrist andPischke 2008). Specifically, we compute the wild bootstrap standard errorsproposed by Cameron, Gelbach, and Miller (2008) as well as White’sheteroskedasticity-robust standard errors. Using these alternative methodsdoes not qualitatively affect our results; the specific results are availableupon request.

Main Results

Effects of the EESL Revision on Employment

To examine the effect of ‘‘mandated’’ continuous employment attributableto the revised EESL, we first graphically compare the labor market out-comes between cohorts affected and unaffected by the EESL revision. Therevision affected cohorts who turned 60 in 2006 or later. Thus, the firstcohort affected by the revision was born in 1946. Below, we compare thecohorts born in 1945 (unaffected cohort) and 1946 (affected cohort).

Figure 1 plots the average of the selected outcome variables over age inmonths for the two cohorts. Panels A and B in Figure 1 show that thecohort affected by the EESL revision is more likely to stay in the labor forceand be employed after age 60 than are cohorts not affected by the revision.Although the labor force participation rates and the employment ratesbefore age 60 are similar across the two cohorts, the decline at age 60 is lesspronounced for the cohort born in 1946. Specifically, the labor force partic-ipation rate of 61-year-olds increased from 76.0% for men born in 1945 to81.0% for those born in 1946. Similarly, the employment rate increasedfrom 71.8 to 76.9%.

However, panel C in Figure 1 shows that the cohort born in 1946 is morelikely to be self-employed than is the cohort born in 1945, for some

23The 10 regions in Japan are Hokkaido (reference), Tohoku, Minamikanto, Kitakanto and Koshin,Tokai, Hokuriku, Kinki, Chugoku, Shikoku, and Kyushu.

24Note that data on educational background are not available, and thus, our analyses do not controlfor educational background.


unknown reasons.25 Furthermore, a closer look at the data reveals that thisresult is more likely an anomaly of the 1945 cohort, who are less likely to beself-employed than any other cohorts born in the 1940s.26 Regardless of thereason for this low self-employment rate among the 1945 cohort, it is worri-some that the difference in the self-employment rate between the twocohorts becomes wider as they age: at age 59, the difference is about 1.8%,whereas at age 61, the difference is about 3.1%. Changes in total employ-ment include this bump in self-employment, and so it may be misleading tointerpret increases in labor force participation and total employment asstemming solely from the EESL, as observed in panels A and B, respectively.

25We examined the reason for this lower self-employment rate of the 1945 cohort by comparing theindustry composition of self-employed people, the firm-size distribution of salaried workers, and somedemographic characteristics, such as region of residence with adjacent cohorts, but we did not detectany systematic differences.

26This observation is not an anomaly of the Labour Force Survey. Using data from the quinquennialEmployment Status Surveys, we confirmed that self-employment of the men born in 1945 is particularlylower than that of their surrounding cohorts.

Figure 1. Age Profiles of Various Employment Outcomes (cohort 1945 vs. cohort 1946)

A. Labor force participation B. Employed (including self-employed)

.4.5

.6.7

.8.9

1Fr

actio

n

55 56 57 58 59 60 61 62 63 64 65Age

cohort: 1945 cohort: 1946

.4.5

.6.7

.8.9

1Fr

actio

n

55 56 57 58 59 60 61 62 63 64 65Age


C. Self-employed

0.1

.2Fr

actio

n

55 56 57 58 59 60 61 62 63 64 65Age


D. Salaried workers

.4.5

.6.7

.8.9

1Fr

actio

n

55 56 57 58 59 60 61 62 63 64 65Age


Source: Data are from the Labour Force Survey.Note: Markers represent the averages of outcomes at age in month.

16 ILR REVIEW

Since self-employed workers are not subject to the EESL, we focus on thepopulation ratio of salaried workers (employed people excluding the self-employed) as our main outcome variable. Note that we do not drop theself-employed from the sample throughout the article, as it would create asample selection problem. Instead, we create a dummy for the salariedworkers, excluding the self-employed, while retaining the self-employed inthe sample.

Panel D in Figure 1 shows the share of salaried workers in the popula-tion. Compared to the graph in panel B, the difference between the twocohorts becomes very subtle. This finding implies that a non-negligible frac-tion of the increase in employment was driven by the increase in the self-employed. Yet, there might be some effects that are not visually discerniblethat are statistically detectable. Indeed, the fall in the ratio of salaried work-ers from age 59 to age 61 is lower for the cohort born in 1946—10.8%—than it is for the cohort born in 1945—13.5%. Thus, we conduct thedifference-in-difference analysis below.

We expect that the ratio of salaried workers is higher for the 1946 cohortfor the ages of 60, 61, and 62 because, as stated before, the age until whichemployers are legally obliged to continue employment was 60 for the cohortborn in 1945 and 63 for the cohort born in 1946. Note that the legal obliga-tion to continue employment is effective until the day the worker turns theage specified by the EESL. Therefore, workers born in 1946 are no longerentitled to this mandated continued employment once they turn 63.

Table 4 presents the estimated effect of the EESL revision using thedifference-in-difference model specified as Equation (1). Column (1) of Table4 shows that the cohort born in 1946 is more likely to be a salaried worker atthe ages of 60 and 61 by 2.4 and 3.2 percentage points. Furthermore, thoughnot statistically significant, the point estimate of the effect is as large as 1.6 per-centage points for age 62. Moreover, it is reassuring that the positive effect dis-appears once the cohort turns 63. This result is consistent with the fact thatthe EESL requires employers to continue employment only until the day theworker turns 63, and thus, b63 should be close to zero.

We also analyze how the effects of the EESL revision differ across firms ofvarying employment size. As discussed earlier, reemployment after the man-datory retirement age was already quite common in small-sized firms, evenbefore the EESL revision. By contrast, mandatory retirement (often at age60) was more strictly applied—and hence reemployment after that age wasless common—among large-sized firms before the EESL revision. A higherscope for large-sized firms to employ workers above this age exists after theEESL revision; therefore, the effect of the revision is expected to be largerfor employees in large-sized firms.

The rest of the columns in Table 4 confirm this prediction. Column (2)shows that most of the increase in the ratio of salaried workers comes froman increase in employees in large-sized firms (500 or more employees),which likely reflects an increase in retention of the incumbent workers


rather than new hires. By contrast, columns (3) and (4) show no positiveeffect of the EESL on employment at medium-sized and small-sized firms.27

These results suggest that the EESL was effective only for large-sized firms,as expected.

Interaction between the EESL and the Increased Pension Eligibility Age

The previous section showed that the revised EESL increased employmentof the affected cohort when the pension eligibility age remainedunchanged. We now explore whether the effect of a one-year increase inthe pension eligibility age is larger under the revised EESL than before therevision.

The difference between cohorts born in 1946 and 1947 captures the com-bined effect of a rise in the pension eligibility age and the revised EESL,whereas the difference between the cohorts born in 1944 and 1945 capturesthe effect of a rise in pension eligibility age only. Thus, by comparing themagnitude of the estimated effect for each of the two cohort pairs, we canexamine whether the combination of supply-side (pension reform) and

27Note that the estimated coefficients in columns (2)–(4) do not exactly sum up to those in column(1) because ‘‘salaried workers’’ include workers in the public sector.

Table 4. Effect of EESL Revision on the Population Ratio of Salaried Workers(difference-in-difference 1945 vs. 1946)

Variable

(1) (2) (3) (4)Salaried

workers (total)Employed at

large-sized firmEmployed at

medium-sized firmEmployed at

small-sized firm

1946 cohort 0.024*** 0.019 0.005 20.0043 age 60 dummy [0.006] [0.011] [0.009] [0.007]

1946 cohort 0.032*** 0.019* 20.002 0.0103 age 61 dummy [0.007] [0.010] [0.008] [0.006]

1946 cohort 0.016 0.016* 0.004 20.0083 age 62 dummy [0.013] [0.009] [0.009] [0.011]

1946 cohort 20.010 0.002 20.005 20.0103 age 63 dummy [0.012] [0.010] [0.007] [0.009]

1946 cohort 20.009 0.010 0.001 20.025***3 age 64 dummy [0.008] [0.009] [0.008] [0.007]

Sample size 98,554 98,554 98,554 98,554R2 0.050 0.022 0.006 0.007

Notes: Standard errors with clustering for year 3 cohort group are presented in brackets. Salariedworkers do not include the self-employed, though we retain the self-employed in the sample. Likewise,the population ratio of employees by firm size is the number of salaried workers in each category offirm size divided by entire population. The size of firms is as follows: large-sized firm (500+), medium-sized firm (100–499), and small-sized firm (\ 100). Control variables omitted from the table includeage dummies, cohort dummy, regional unemployment rate, region dummies, and population size ofmen in the same age and region.*, **, *** indicate coefficients are statistically significantly different from 0 at the 10%, 5%, and 1%level, respectively.

18 ILR REVIEW

demand-side (EESL revision) interventions on employment can be moreeffective than the supply-side intervention (pension reform) alone.

We begin with the combined effects of the increased pension eligibilityage and the revised EESL. Table 5 compares the employment status ofcohorts born in 1946 and 1947. Since the two cohorts are exposed to thesame institutions up to the end of age 62, the differences between thesecohorts are expected to be negligible until age 62. That is, b60, b61, and b62

are expected to be zero. Column (1) of Table 5 shows that the estimatedcoefficients are, indeed, statistically insignificant in all columns.

By contrast, the two cohorts are exposed to differing institutions afterthey turn 63; only those born in 1947 are subject to the rise in the pensioneligibility age. Because the mandated continued employment by the revisedEESL is up to the pension eligibility age, those born in 1947 were subject tothe mandated continued employment up to age 64, while those born in1946 were not. Thus, b63 is expected to be positive. Column (1) of Table 5shows that the cohort born in 1947 is more likely to be a salaried worker atage 63 than the cohort born in 1946 by 4.1 percentage points. This effect islarger than the effect of the introduction of the mandated continuedemployment itself, which is shown in Table 4.

Of note, b64 is also significantly positive (3.2 percentage points), implyingthat some firms extended the continued employment up to age 65 instead

Table 5. Combined Effects of EESL and Pension Eligibility Age on the PopulationRatio of Salaried Workers (difference-in-difference 1946 vs. 1947)

Variable

(1) (2) (3) (4)Salaried




small-sized firm

1947 cohort 0.009 0.002 0.008 0.0063 age 60 dummy [0.009] [0.011] [0.009] [0.008]

1947 cohort 20.011 20.001 20.003 20.0053 age 61 dummy [0.012] [0.011] [0.007] [0.011]

1947 cohort 20.016 0.011 20.003 20.018**3 age 62 dummy [0.011] [0.012] [0.005] [0.008]

1947 cohort 0.041** 0.031** 0.013** 20.0053 age 63 dummy [0.015] [0.011] [0.005] [0.010]

1947 cohort 0.032*** 0.010 20.001 0.021**3 age 64 dummy [0.010] [0.008] [0.006] [0.009]

Sample size 113,676 113,676 113,676 113,676R2 0.038 0.017 0.005 0.005



of age 64. Since firms knew that the maximum age of mandated employ-ment would be limited to age 65, some of them might have chosen to avoidthe adjustment costs that would have been incurred to change the systemagain in two years.

Additionally, as in the case of the EESL revision itself, the increase inemployment is mainly attributed to the increase in the number of employ-ees at large-sized firms, although positive effects are observed for employ-ment at medium-sized firms at age 63 and in small-sized firms at age 64.Column (2) of Table 5 shows that the population share of employees atlarge-sized firms increased by 3.1 percentage points for age 63 and (thoughnot statistically significant) by 1.0 percentage point for age 64.

Next, we compare the cohorts born in 1944 and 1945; both were exposedto different pension eligibility ages, but neither was subject to the revisedEESL. Thus, their comparison quantifies the effect of the increased pensioneligibility age in the absence of the mandated continued employment. Themagnitude of this effect serves as a benchmark to compare with the com-bined effect presented in Table 5, to see if supply-side interventions can bemore effective when combined with demand-side interventions.

As shown in column (1) of Table 6, modestly positive effects wererevealed on the ratio of salaried workers aged 62 and younger. These

Table 6. Effect of Pension Eligibility Age Only on the Population Ratio of SalariedWorkers (difference-in-difference 1944 vs. 1945)

Variable

(1) (2) (3) (4)Salaried




small-sized firm

1945 cohort 0.017*** 0.011 20.003 0.0073 age 60 dummy [0.003] [0.009] [0.008] [0.006]

1945 cohort 0.004 0.013* 0.008 20.013 age 61 dummy [0.010] [0.007] [0.006] [0.011]

1945 cohort 0.022** 0.016** 0.011 20.0033 age 62 dummy [0.010] [0.007] [0.008] [0.007]

1945 cohort 0.015 0.003 0.002 0.0093 age 63 dummy [0.009] [0.009] [0.008] [0.010]

1945 cohort 0.008 20.001 20.004 0.013 age 64 dummy [0.014] [0.008] [0.008] [0.009]

1945 cohort 20.025* 0.000 20.004 20.024***3 age 65 dummy [0.013] [0.011] [0.007] [0.005]

Sample size 94,039 94,039 94,039 94,039R2 0.047 0.022 0.006 0.006


20 ILR REVIEW

positive coefficients, especially those at age 62 (2.2 percentage points), canbe interpreted as the effect of the rise in the pension eligibility age from 62to 63. That is, the labor supply at age 62 was higher for the cohort born in1945, because they were not able to receive the full pension benefit at thetime.

Nonetheless, compared with the combined effects of the EESL revisionand the pension reform presented in Table 5, the estimated effects of theone-year increase in the pension eligibility age without the revised EESL aresmaller and less statistically significant. For example, the point estimate incolumn (1) of Table 6 indicates that the cohort born in 1945 is only 2.2 per-centage points more likely to be a salaried worker at age 62 than the cohortborn in 1946. This translates to about half the effect of a one-year increasein the pension eligibility age under the revised EESL shown in Table 5,where the cohort born in 1947 is 4.1 percentage points more likely to be asalaried worker at age 63 than the cohort born in 1946.28 Since these twoestimates are not statistically different at the usual level, our results are, atbest, suggestive. They may imply, however, that the increase in the pensioneligibility age––a conventional supply-side intervention––can be more effec-tive in increasing elderly employment when combined with demand-sideinterventions, such as the EESL revision. This finding is broadly consistentwith that of Neumark and Song (2013), who reported that the rise in thesocial security retirement age has a stronger impact in states where the anti-age discrimination law is stricter.

Robustness Checks

Falsification Test

We conduct a falsification test to ensure that policy changes alone, ratherthan other cohort-specific shocks, explain our estimates. Specifically, weexamine whether the earlier cohorts, who should not be affected by theEESL, show any discernible patterns at the ages of our study interest. Such atest, for example, could exclude the possibility that we spuriously capturethe increasing trend of elderly employment. Because we use three cohorts(born in 1945, 1946, and 1947) in the main analysis, the natural candidatesfor the tests are two adjacent cohorts born before 1945 (such as the 1944cohort versus the 1943 cohort). However, as we explained in theBackground section, the revision of the earnings test for the pension benefitaffects each of the older cohorts differently. In particular, the comparisonbetween the cohorts born in 1943 and 1944, both of whom share the samepension eligibility age, would not work as a valid falsification test becausethe cohort born in 1944 knew that the earnings test would change in thefollowing year at the time of its mandatory retirement in 2004 (when the

28These results should be viewed with caution, as we compare changes in the retirement age that affectmarginal workers at varying ages.


revision of the earnings test was announced), whereas the cohort born in1943 did not anticipate this change.

Therefore, we choose to compare the cohorts born in 1941 and 1942,which share the same pension eligibility age (61 years) and are not affectedby the EESL. Additionally, when the earnings test was changed in 2005,these cohorts were already 63 and 64 years old. Given the limited employ-ment opportunities for elderly men once they have retired, the effect of thechange in the earnings test for these cohorts is expected to be small andshould also be limited to those after age 63. Thus, we run Equation (1)using these two adjacent cohorts as a falsification test. Table 7 summarizesthe results of that test. It is reassuring that differences in employmentbetween these two cohorts are, for the most part, statistically insignificant.

Finally, recall that the underlying assumption for our estimates to beunbiased is that no systematic difference between the two cohorts exists,except for the exposure to the EESL revision and the increased pensioneligibility age. Since we include the cohort dummy in all specifications (Ti

in Equation (1)), any time-invariant differences between cohorts should beaccounted for. Furthermore, to mitigate concerns that time-varying factorsother than the EESL exposure and increased pension eligibility age could

Table 7. Falsification Test: Comparisons between Cohorts That Faced theSame Pension Scheme and Unaffected by the EESL (difference-in-difference

1941 vs. 1942)

Variable

(1) (2) (3) (4)Salaried




small-sized firm

1942 cohort 0.000 0.01 0.009 20.0163 age 60 dummy [0.015] [0.009] [0.005] [0.010]

1942 cohort 0.002 0.016 0.011* 20.016*3 age 61 dummy [0.009] [0.011] [0.005] [0.009]

1942 cohort 20.006 0.014 0.005 20.0173 age 62 dummy [0.010] [0.011] [0.006] [0.012]

1942 cohort 20.001 0.016 20.007 20.0023 age 63 dummy [0.009] [0.011] [0.006] [0.010]

1942 cohort 0.004 0.015 20.005 20.0023 age 64 dummy [0.011] [0.012] [0.007] [0.009]

1942 cohort 0.003 0.018 20.005 20.0063 age 65 dummy [0.010] [0.011] [0.005] [0.008]

Sample size 120,688 120,688 120,688 120,688R2 0.047 0.028 0.006 0.007

Notes: Standard errors with clustering for year 3 cohort group are presented in brackets. Salariedworkers do not include the self-employed while we retain the self-employed in the sample. Likewise, thepopulation ratio of employees by firm size is the number of salaried workers in each category of firmsize divided by entire population. The size of firms is as follows: large-sized firm (500+), medium-sizedfirm (100–499), and small-sized firm (\ 100). Control variables omitted from the table include agedummies, cohort dummy, regional unemployment rate, region dummies, and population size of menin the same age and region.*, **, *** indicate coefficients are statistically significantly different from 0 at the 10%, 5%, and 1%level, respectively.

22 ILR REVIEW

affect our treatment and control cohorts differently, we control for regionalunemployment rates and region dummies as well as the size of the malepopulation of the same cohort and region in our main regressions. In fact,we also estimate Equation (1) without these time-varying controls and con-firm that the estimates are minimally affected by excluding such time-variant controls (results are available upon request).

Although each piece of evidence by itself is not sufficient, the weight ofthe evidence considered together indicates that we are not spuriously pick-ing up any cohort-specific or age-specific effects.

Effects on Employment including the Self-Employed

In our main analyses, we focus on the salaried workers because the self-employed are not subject to the EESL. It is still possible, however, that theself-employed are also affected by the EESL revision. On one hand,the number of self-employed may increase if the EESL revision altered thesocial norm, so that even self-employed workers believe they should con-tinue to work after they reach 60. On the other hand, the revision mayreduce the number of self-employed people, because those who would haveswitched to becoming self-employed had there been no EESL revisionwould now remain employed at firms.

Therefore, we re-estimate Equation (1) by replacing the outcome withemployment including both salaried workers and the self-employed. Table8 presents the results. To ease comparison, in the odd-numbered columns,we replicate the estimates for salaried workers only, and the even-numberedcolumns show the estimates for total employment.

Column (2) of Table 8 shows the effect of the EESL revision on totalemployment by comparing cohorts born in 1945 and 1946. Compared tocolumn (1) presenting the effect on salaried workers only, the estimatedeffects on employment at ages 60 to 62 in column (2) are larger by 1.1 to1.4 percentage points. Additionally, b62 becomes statistically significant atthe 5% level.

Columns (3) and (4) of Table 8 compare cohorts born in 1946 and 1947.Inclusion of self-employment does not change the results by much; the com-bined effects of the EESL revision and pension reform are positive for 63-and 64-year-old men. These results are expected, because we do not see anybumps in the self-employed portion for cohorts born in 1946 and 1947.Columns (5) and (6) are slightly different from each other because thetreatment group is the cohort born in 1945, for which we found a low self-employment rate.

Effects on Married Women’s Employment

Thus far, we have focused on male workers, as female workers are less likelyto be directly affected by the EESL. In fact, as Appendix Table A.1 shows,women’s employment has not been affected by the EESL revision.


Tab

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Nonetheless, it is possible that married women adjust their labor supply inresponse to how the revised EESL affects their husband’s employment. Theusual income effect on women (of husband’s income) would predict areduction in the women’s labor supply; the complementarity of leisure,however, might predict an increase in the women’s labor supply. Therefore,just how the EESL revision affects married women’s employment throughchanges in their husbands’ employment is a priori ambiguous.

Because the Labour Force Survey is a household survey, we can identifythe cohort to which each married woman’s husband belongs. Using thisinformation, we estimate the following equation:

ywi =

X65

a = 60

Aha, i aa +baT h

i

� �+ gT h

i + dXi + ei ,ð2Þ

where yiw is a dummy for wife’s employment, Ah

a,i is a dummy variable thatindicates the husband of couple i is a years old, and Ti

h is a dummy variablethat indicates that the husband belongs to the treatment group (i.e., theyounger cohort). The variables included in Xi are the same as thoseincluded in Equation (1). This equation is analogous to Equation (1),where outcome is now the wife’s employment (yw

i ); however, please notethat the ages used in Equation (2) should come from the husband (Ah

a,i).Table 9 reports no effect on married women’s labor supply when therevised EESL increases the employment of their husbands.

Table 9. Effects of EESL Revision/Pension Eligibility Age on Married Women’sEmployment

Outcome: (1) (2) (3)Employed 1945 vs. 1946 1946 vs. 1947 1944 vs. 1945

After 0.008 20.013 0.0013 age 60 dummy [0.026] [0.024] [0.023]

After 0.007 20.017 20.0033 age 61 dummy [0.029] [0.025] [0.025]

After 0.002 20.017 20.0193 age 62 dummy [0.027] [0.025] [0.023]

After 0.02 20.008 20.0383 age 63 dummy [0.029] [0.026] [0.025]

After 0.019 20.009 20.0293 age 64 dummy [0.026] [0.025] [0.025]

After 0.008 — 0.0003 age 65 dummy [0.025] — [0.024]

Sample size 80,224 91,236 76,941R2 0.011 0.007 0.01

Notes: Standard errors with clustering for year 3 cohort group are presented in brackets. Thedependent variable is a dummy variable for being employed, including both salaried workers and self-employed. Control variables omitted from the table include age dummies, cohort dummy, regionalunemployment rate, region dummies, and population size of men in the same age and region.*, **, *** indicate coefficients are statistically significantly different from 0 at the 10%, 5%, and 1%level, respectively.


Conclusion

An aging population imposes enormous fiscal pressure on the stability ofsocial security systems across the world. One way to maintain the social secu-rity systems is to ensure that the elderly stay in employment longer. Tounderstand the effectiveness of such a policy, we examined the effect of theEESL revision in Japan, which legally obliged employers to offer continuousemployment up to the pension eligibility age.

We found that the EESL revision increased the employment rate of menin their early 60s among the affected cohorts. Notably, we found that theeffect was limited to employees at large-sized firms, consistent with the viewthat the EESL was binding only for large-sized firms. These results implythat government intervention on the demand-side can be effective inincreasing employment only for large-sized firms.

We further found suggestive evidence that the effect of an increase in thepension eligibility age is larger for the cohorts subject to the revised EESL.This result implies that demand-side interventions, such as the EESL revi-sion, can potentially make conventional supply-side interventions, such asraising the pension eligibility age, more effective.

Last, we want to emphasize that even before the EESL revision, no prohi-bition on hiring workers older than the mandatory retirement age of 60 wasin effect. Therefore, the increase in employment after the EESL revisioncan be viewed as a distortion created in the market by a government inter-vention. If the EESL forces employers to hire workers whom they would nothire otherwise, there must be some adjustment in response to this forcedemployment. Who, then, bears the costs? Given that the increase in employ-ment among the elderly was concentrated in large-sized establishments,such adjustment costs are likely to have been borne disproportionately bylarge-sized firms. Examining the kinds of adjustment that employers makeand understanding the parties affected—for example, whether firms limitnew hires or induce quitting before age 60—are possible avenues for futurestudy.

AppendixThe Effect of the EESL Revision on Women’s Employment

Our main analysis focuses on men, as women are less likely to be affectedby the two policy changes analyzed here—namely, the EESL revision in2006 and the raising of the pension eligibility age—for the followingreasons.

First, although the EESL does not discriminate workers by gender, inpractice, few women remain in full-time employment until they reach themandatory retirement age. Since (at least in practice) the EESL is appliedonly to regular workers on full-time contract, most female workers in theirlate 50s do not benefit from the EESL.

26 ILR REVIEW

Second, a woman’s pension eligibility age is determined in a quite-complicated way, depending on her entire work history. Reforms pertainingto the pension eligibility age for the Employee’s Pension—namely, the pen-sion for private-sector employees—were set to come into effect five yearsafter the corresponding change for males. By contrast, the eligibility age ofthe Mutual Aid Pension for public-sector employees started to increase in2001 (from the cohort born in 1941, which is the same as for male workerson Employee’s Pension) for both men and women. Furthermore, anywoman who had worked in the private sector and paid premiums towardthe Employee’s Pension for at least one year was able to receive the full pen-sion benefit at the eligibility age of the Employee’s Pension, even if she hadworked much longer in the public sector.

Hence, among women, we do not expect significant differences inemployment status across cohorts, despite their presence among men.Table A.1 confirms this prediction: when we estimate the same regressionas Equation (1) by using data pertaining to female workers, we find no sta-tistically significant effect on the probability of being a salaried worker.

Table A.1. Effect of EESL Revision/Pension Eligibility Age on the PopulationRatio of Female’s Salaried Workers

Outcome: (1) (2) (3)Salaried workers 1945 vs. 1946 1946 vs. 1947 1944 vs. 1945

After 20.014 0.012 0.0133 age 60 dummy [0.016] [0.017] [0.016]

After 0.003 0.012 0.0253 age 61 dummy [0.020] [0.022] [0.021]

After 0.011 20.002 20.0173 age 62 dummy [0.024] [0.019] [0.027]

After 0.023 20.024 20.0203 age 63 dummy [0.023] [0.022] [0.029]

After 0.031 20.007 20.0133 age 64 dummy [0.024] [0.024] [0.025]

After 0.028 — 20.0013 age 65 dummy [0.028] — [0.027]

Sample size 82,606 93,712 80,649R2 0.009 0.007 0.011

Notes: Standard errors with clustering for year 3 cohort group are presented in brackets. Salariedworkers do not include the self-employed, though we retain the self-employed in the sample. Controlvariables omitted from the table include age dummies, cohort dummy, regional unemployment rate,region dummies, and population size of men in the same age and region. See Appendix for details.*, **, *** indicate coefficients are statistically significantly different from 0 at the 10%, 5%, and 1%level, respectively.


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